In The Headlines

In The Headlines

Fracking Makes “Made in the USA” More Attractive

“Made in the U.S.A” is becoming more affordable and the reason is fracking. What is not so well known is just how competitive cheap oil and gas has made American manufacturing. BCG, the Boston consultancy, estimates the average cost to manufacture goods in the U.S. is now only 5% higher than in China and is actually 10% to 20% lower than in major European economies. Even more striking is BCG’s projection that by 2018, it will be 2% to 3% cheaper to make goods here than in China.

Part of the reason for the narrowing gap is that wages have been rising in China, and American companies have been boosting their productivity faster than many of their international competitors. But perhaps the single largest factor is that fracking has helped dramatically drive down the price of oil and gas which is being used in energy intensive industries such as steel, aluminum, paper and petrochemicals. BCG calculates that U.S. industrial electricity prices are now 30% to 50% lower than those of other major exporters.

“A 5% price discrepancy in manufacturing between China and the U.S. doesn’t amount to much,” says BCG’s David Gee, “when you consider that U.S. manufacturers face the risks of delay when shipping from China, the threat of port strikes, and the local investments and partnerships that Beijing often requires of foreign companies doing business there.”
Lower energy prices can also open up new opportunities such as a using natural gas to power fleet vehicles and trucks, which would reduce American dependence on foreign oil and cut greenhouse gases. Natural gas can also be converted into hydrogen to power fuel cells like the ones in Toyota’s Mirai passenger car. The Japanese car giant will start taking orders for the Mirai in California this summer.

Over the last few years, cheap energy has encouraged players in various industries to earmark $138 billion for new U.S.-based investments. This spring, for example, the petrochemical giant Sasol started construction on an $8.1 billion ethane cracker at Lake Charles, La. And energy companies like Cheniere LNG are building multi-billion LNG terminals on the Gulf of Mexico to export overseas, where natural gas can be three to four times more expensive than it is in the U.S.

How long will America’s advantage last? Harvard Business School’s Michael Porter, who along with BCG issued a new report in June called America’s Unconventional Energy Opportunity, says that America has about a 15-year lead on other nations when it comes to fracking. The most telling number to make that point? The U.S. has 101,117 fracked wells, followed by Canada’s 16,990. By contrast China has 258.

Despite its potential economic benefits, however, fracking faces opposition in many communities. Opposition centers primarily on concerns over local environmental and climate impacts. Public support for unconventional energy development, and especially fracking, is decidedly mixed, and seems to be declining. According to the BCG report, this could ultimately threaten further development.

Crumbling Waterway Infrastructure Threatens U.S. Competitiveness

One of the essential elements of infrastructure in the U.S. is the river lock. Most locks close off a 600- to 1,200-foot stretch of river and raise and lower the water in the sealed-off chamber. Towboats and barges enter and exit the locks to travel between sections of river that are at different levels. The U.S. has 242 locks in operation on 12,000 miles of navigable waterways. In 2013, $216 billion in freight moved along them, including the Mississippi, Ohio, and Illinois rivers. Moving oil, coal, soybeans, and cement by barge is much cheaper than by rail or highway. Without the locks, such low-cost shipping would be nearly impossible.

The locks are in dire need of repair and replacement. Mechanized gates get stuck, and chunks of concrete are falling off walls battered by barges. In October 2011, a 280-foot section of wall by the Lockport Lock in Illinois crumbled into the water. In 2013, the Algiers Lock in Louisiana was shut down for four months to repair an underwater part that failed. The shutdown cost businesses $146 million in lost revenue and the expenses of rerouting cargo along other waterways. Some of the hydraulic motors powering the locks were installed in the 1930s. Many of the older locks with 600-foot-long chambers are too small to accommodate the towboat and its typical 15-barge load: The boats have to split up the barges and make two trips through the small locks.

The U.S. Army Corps of Engineers, which manages the system, “continues to Band-Aid the locks to keep them operational,” says Kim Ekena, Vice President of Archer Daniels Midland’s American River Transportation. “The thought was the locks would last 50 years. We are getting to a point where we are talking about 70 or 80 years.” Congress authorized improvements last year and in 2015 hiked a tax on diesel fuel to help finance them. Yet the Waterways Council, which represents barge operators, shippers, and river ports, estimates that $9.2 billion in essential construction and repairs remains unfunded.

The U.S. faces a serious rival in Brazil, which since 2007, has been investing in its transportation infrastructure, including river ports to ship soybeans and other commodities for export from large farms in the interior. It has become a top soybean exporter. U.S. market share of soybean exports dropped from 71% in 1992 to less than 50% today, according to a February 2015 report by the U.S. Department of Agriculture. The U.S. share could drop further, according to the report. As the Brazilians keep improving the efficiency of their river freight system, while U.S. river locks struggle to keep cargo moving, buyers of U.S. commodities may tilt more to Brazil. U.S.-based agriculture companies Archer Daniels Midland, Cargill, and others have been investing in ports and barges in the Amazon to help meet demand from China, the No. 1 soybean importer, as well as other nations. Says Mike Toohey, President of the Waterways Council, “If we’re not prepared, commerce will flow to where you get the best price and reliability.”

Brazil may be in a better position to benefit when the expansion of the Panama Canal is finished next year. The upgraded canal will feature a new lane for bigger ships. As a result, the canal’s cargo capacity will double. With shorter waiting times to get through the canal, more ships will travel more quickly to pick up their Asia-bound cargoes at U.S. and Brazilian ports in the Gulf and on the Atlantic.

Lower transportation costs rather than production costs have kept U.S. soybeans competitive globally, says Mike Steenhoek, Executive Director of the Soy Transportation Coalition. “If we have these failures at our locks, that will insert a cost into the system. Any kind of benefit you could potentially realize from the Panama Canal expansion will really be moot.”
The Army Corps of Engineers keeps applying those Band-Aids. Michael Cox, Chief of Operations for the Corps’ Rock Island district, which oversees 20 locks and dams along the Mississippi River and the Illinois Waterway, is encouraged by some recent increases in funding. But he’s still “very concerned because what we are currently doing cannot be sustained for the long term.”

The Good News Is . . .

• U.S. consumer spending recorded its largest increase in nearly six years in May on strong demand for automobiles and other big-ticket items, further evidence that economic growth was gathering momentum in the second quarter. The Commerce Department said consumer spending increased 0.9% last month, the biggest gain since August 2009, after an upwardly revised 0.1% rise in April. The increases suggested households were finally spending some of the windfall from lower gasoline prices.

• Lennar Corp., one of the nation’s largest homebuilders, reported earnings of $0.79 per share, an increase of 29.5% over year-ago earnings of $0.61. The firm’s earnings topped the consensus estimate of analysts by $0.03. The company reported revenues of $2.4 billion, a 31.6% increase. Management attributed the company’s results to improvement in the market for new homes, a higher gross margin, and a stronger than expected operating margin.

• Allergan, the maker of Botox, said that it would pay $2.1 billion in cash and shares for Kythera Biopharmaceuticals, which makes Kybella, a treatment for double chins. The deal is expected to expand Allergan’s product lines for cosmetic facial treatments. Under the terms of the deal, Allergan would pay $75 per Kythera share. Kythera shareholders would receive 80% of that in cash and 20% in Allergan shares. It is the latest in a series of deals in the pharmaceutical sector this year, as drug makers look to strengthen their mix of products through acquisitions.

Planning Tips

Guide to Using Airbnb and Saving Money on Your Travel Lodgings

The sharing economy has made it very easy to save money by renting other people’s unused things. Airbnb is an online community marketplace that connects people looking to rent their homes with people who are looking for accommodations. Airbnb users include hosts and travelers: hosts list and rent out their unused spaces and travelers search for and book accommodations in 192 countries worldwide. This service offers you the opportunity for significant savings on your travel lodgings. Below are some guidelines to help you get the experience you want.

Define what matters to you – Before you start traveling, you will want to come up with a list of what you need in order to be happy. Remember—long-term travel is very different from a weekend stay. Something that might not bother you on a quick trip, such as a shaky internet connection, will be a big problem if you are there for a month. Be honest with yourself about what you need in order to feel at home, and then use the Airbnb filter to find the listings that match your preferences.

Check out your host before you book – Once you have decided that a place is probably a good fit, Airbnb encourages you to book immediately—do not do this. Instead, use the small “contact the host” link below the “About This Listing” box to send a message to the host—including the dates you want to book—without making a commitment. You do not want to put money down before you are sure the host is responsive and able to answer any questions you have clearly.

Read the reviews – Both the person renting the space and the person who owns the space are encouraged to review each other after a stay, so you are able to read what fellow travelers thought about the space. Reading reviews can help you spot potential problems before you book. Keep an eye out for red flags like issues contacting the host, problems with amenities that you care about, or comments about the general neighborhood. The number of reviews (and cumulative ratings) are also a good indicator of whether you are dealing with someone who frequently has renters, or if it is someone who may lack experience in dealing with guests.

Check out the cleaning arrangement – One thing to be aware of is cleaning. A lot of rentals do not have a cleaning service, so if you are staying for longer than a couple of weeks, you will either have to clean it yourself or work out a deal with the owner to provide cleaning services. Ask if there is a cleaning service, and if not, arrange with the landlord to have the place cleaned periodically while you are staying there.

Longer stays and booking in advance will save you money – By default, Airbnb shows the cost of a listing per night. For example, a listing in Atlanta might cost $82/night if you book it for six nights. However, if you book the same listing for a week, the cost drops to $71/night. If you book for a month, the cost drops further to $51/night. Not all Airbnb listings have breaks for longer stays, but when you search for longer stays, the ones that offer breaks are easy to spot by their lower prices. If you can stay for a month, you stand to save a great deal by taking advantage of Airbnb’s price breaks. Remember, there is only one of each place, so when it is booked, you are out of luck. The nice listings with low prices will be the first to go, so if you are sure of your travel plans way ahead of time, you should book early to make sure you get your pick of the best locations.